The Rise Of FoodTech And What That means For Startups And Investments

The Entry Of FoodTech Startups Has Led To A Massive Transformation In How The Indian Food Industry Operates

The Indian food industry, the sixth largest in the world, has seen unprecedented growth in terms of size and revenues over the past five years. Retail startups contribute about 70% to the total sales, while food processing companies account for the balance 30% of the country’s total food market.

A high-growth sector, the Indian food industry is poised for even greater growth with the use of tech and estimated to $894.98 Bn in size by 2020, while the food service industry is expected to reach $78 Bn by 2018.

The question is:

Do the current market situation, production capabilities, and government policies support the realisation of this massive business potential?

Falling Agricultural Produce And Rising Taxes: The Challenges And Incentives

The dismal performance of the agricultural sector over the past two years has slowed down India’s overall economic growth. Given how critical agriculture as a sector has been to the Indian economy, this is something that needs to be urgently addressed.

Various incentives at central and state government level on supply chain infrastructure.

In Union Budget 2017-18, the Government of India has set up a dairy processing infra fund worth $1.2 Bn (INR 8K Cr).

100% FDI in food product ecommerce through automatic route.

These incentives are a healthy sign of the government’s commitment towards reinvigorating the country’s agricultural sector and these measures will lead to a slew of international brands entering the Indian market.

On the other hand, the government hasn’t been as benevolent to restaurants, especially when it comes to taxation as it withdrew input tax credit for restaurants.

Setting up restaurant can be quite taxing.

According to Rahul Singh, President of the NRAI, it takes over two dozen licences and permissions to be able to serve a sandwich. For an industry claimed to be worth $54.4 Bn (INR 350K Cr), generating over eight million jobs, such restrictive policies and flip-flops on core matters like alcohol sale, impede growth.

Segments like grocery delivery, personal chefs, box delivery, and on-demand meals are becoming increasingly popular, leading to an unprecedented number of startups joining the race for market share.

To Deliver Or Not To Deliver!

Since this sector was so hyped, it deserves its own heading. According to a Bloomberg report, more than 400 food delivery apps were operational in India between 2013 and 2016. The online food delivery industry grew by 150% year-on-year, with an estimated Gross Merchandise Value (GMV) of $300 Mn in 2016.

But this sector has witnessed a lot of consolidation.

While some ventures with a unique idea managed to survive, others succumbed to market forces simply due to bad timing or lack of funding options. The sector received a mere $78 Mn worth of funding in 2016, in comparison to the $500 Mn in 2015.

Promoters need to realise that the total number of transactions by consumers is quite small, while the costs of delivery, customer acquisition, and daily operations are quite high. This makes pure-play food delivery services an expensive proposition for most startups.

With the industry moving towards consolidation to build brand portfolios comprising multiple services and products, the sustenance of standalone food delivery companies will be difficult in the long term.

The food aggregation and marketplace model is nearing saturation, leading to startups exploring emerging business models such ascloud kitchens, ratings, and review etc.

While aggregators like Zomato, Swiggy, and foodpanda are the dominant marketplaces in the country, startups like FreshMenu, Box8, and Faasos are making waves in the pure-play cloud kitchen segment.

The overall impact of the rising competition in the foodtech space will only help the industry grow in the next few years. Ventures in the foodtech space need to explore models that offer multiple monetisation channels.

So, What Will 2018 Hold?

As an active investor in this space, I see a number of business plans in the foodtech segment – after all, we are all passionate about food. The first and foremost submission I have is for entrepreneurs to distinguish between a passion that is a lifestyle business and one that is a scalable, investable business.

The food processing sector saw commitments of over $10 Bn in 2017 led by firms like Coke, Pepsi, ITC and home growth Patanjali. This sector is promising and will continue to see corporate investments and growth

On the consumer side, 2018 shall most likely see significant consolidation in segments like delivery, cloud kitchens, business-to-business and business to business to Consumer catering.

Where Do I See Opportunity?

India is a huge market, and we have a soul connection to food. We are a diverse country with a plethora of regional cuisines. Indian food is gaining global appeal – Marks & Spenser sells ready-to-serve chicken tikka masala in the UK!

At the same time, our habits are changing, and we are more accepting a global palate – parathas and lassi at a breakfast are being replaced with muesli and a smoothie!

On the consumer front, high real estate costs, pilferage, staff training, irrational government policies make it tricky to establish a successful business.

Some of the trends that I see shaping things in 2018 for the Indian foodtech market include –

The Paperboat Effect – During my MBA, I had written a report for Virgin Cola on the Indian beverage market and had concluded that packaged Nimbu Pani would be the best seller in India! Thanks to Paperboat, the sector is seeing a lot of activity with a host of firms packaging traditional food in modern formats. Examples include Indian-flavour sauces and spreads, restaurants like Burger Singh and Wow Momos appealing to Indian taste buds (I love Tandoori momos but am not a big fan of their chocolate momo).

The Health-Conscious Consumer – This trend will continue to see a host of product launches, whether it is firms like Activ8me, which places vending machines in corporate offices stocked with Yoga Bars, healthy snacking options, and cold-pressed juices, to a host of companies exploring vegan, gluten-free and diabetic-friendly products.

It’s All About Convenience – The modern consumer is looking for convenience. Inner Chef posts better quarter on quarter numbers and others like Lets Meat (from Jaipur, that recently launched in Delhi) makes it easier to get pre-cooked food delivered. 2017 saw a host of new players in the frozen and ready to serve food category, in part driven by retailers like 24/Seven stocking ready-to-eat food. On every visit to Modern Bazaar or Le Marche, there is always a new promotion to taste.

Authenticity & Freshness – The Indian consumer palate is rapidly evolving, and 2016-17 saw a host of companies like Vahdam Teas, which promise fresh tea delivered to our doors raise money. There are a number of firms making artisan chocolates, and an explosion of delivery-only restaurants. This trend will continue, as driven by exposure to MasterChef we are all connoisseurs in our own right.

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.

Author

A self-confessed foodie, with an Instagram food blog @ishanlikestoeat, Ishan is the founder of RevStart Incubation Center, which offers co-working, incubation and acceleration services to firms. He is an active angel investor with several investments in the food sector.